Difference Between Forward Integration and Backward Integration
What is Forward Integration?
Forward integration is a strategy where the company gains control of the business activities that are ahead in the value chain. This is a type of vertical integration of the supply chain. Forward integration practically means “removing the middleman”. Manufacturers may skip the wholesalers/retailers in the value chain to sell directly to customers.
As an example, imagine that a company produces shoes and it opens its shoe retail outlet as well. So the company will directly sell its designs to customers instead of selling them through other retail stores.
What is Backward Integration?
Backward integration is a strategy where the company gains control of the business activities that were behind in its value chain. The company gains control over the raw materials using the backward integration method.
Backward integration is where a company expands across multiple supply chain segments, which are behind its value chain, to control a part or entire production process. This is a form of vertical integration, where the company performs tasks that were formerly performed by its suppliers.
Differences between Forward Integration and Backward Integration
Differences between Forward Integration and Backward Integration are explained in the below table,
| Forward Integration | Backward Integration |
|---|---|
| The company gains control of the business activities that are ahead in the value chain | The company gains control of the business activities that were behind in their value chain |
| The company acquire or merge with a distributor | The company acquire/merge with a supplier or manufacturer |
| Gain control over the distribution chain | Gain control over the supply chain |
| The main purpose is to obtain a greater market share | The main purpose is to realize economies of scale |
| Example: FMCG goods production company acquires or starts a distribution company. Now the company can have control over its distribution process. | Example: Clothing manufacturing company acquires or starts a fabric company. Now the company can have adequate raw materials for producing cloths. |
Differences between Forward Integration and Backward Integration are explained in the below points,
- Forward integration is where the company gains control of the business activities that are ahead in the value chain. Backward integration is where the company gains control of the business activities that were behind in their value chain.
- In forward integration, the company acquires or merges with a distributor. In backward integration, the company acquires/merges with a supplier or manufacturer.
- In forward integration, the company gains control over the distribution chain. In backward integration, the company gains control over the supply chain.
- The main purpose of forward integration is to obtain a greater market share. The main purpose of backward integration is to realize economies of scale.
- Example of Forward Integration: A FMCG goods production company acquires or starts a distribution company. Now the company can have entire control over their distribution process.
Example of Backward Integration: A clothing manufacturing company acquires or starts a fabric company. Now the company can have enough raw materials for making dresses.
Recommended Articles:
- Vertical Integration
