Understanding Backward Integration – with Real Industry Examples

Definition of Backward Integration

Backward integration is a strategy where the company gains control of the business activities that were behind in their value chain. The company expands to accomplish tasks that were performed by the previous levels of the supply chain.

Backward integration is where the company acquires or starts another new company that supplies the products or services required to fulfill its manufacturing process. The company gains control over the raw materials using the backward integration method.

The backward integration method will result in many benefits to the company such as cost savings, increased revenues, and improved efficiency in the production process. This is a technique to obtain a competitive advantage and increase barriers to entry.

Real Industry Examples of Backward Integration

1. Netflix Started their Own Production and Shows

Netflix originally started with renting DVDs through mail service. Company then shifted to deliver on-demand entertainment globally. Netflix then started to develop their own production and shows which is a real-world industry example for backward integration.

More information and reference: Article Published in BMI

2. Continental acquired Veyance Technologies in 2015

Continental is an international automotive supplier and tyre manufacturer. Veyance Technologies was a manufacturer of rubber products for industrial companies. Continental expects to expand its global position in rubber and plastics technologies and further increase the proportion of industrial and end-customer sales.

More information on this acquisition: News Published in continental.com, Article Published in im-mining.com, Paper of Backward and Forward Integration.

3. Amazon started “Amazon Publishing”

In 1995 Amazon started as an online book retailer (internet bookstore) procuring books from publishers. In 2009 Amazon started “Amazon Publishing” which allows them to publish books. After the above, Amazon may receive a cut on both as publisher and as bookseller if a reader buys one of its titles.

More information on this acquisition:” The Amazon Publishing Juggernaut” – Article Published in The Atlantic, “How To Self-Publish Your Book Through Amazon” – Article Published in Forbes

4. Acer acquires stake in a venture of Texas Instruments

Acer’s product range includes laptop and desktop PCs, tablets, smartphones, monitors, projectors, etc. The synergies of this business activity were to produce semiconductors and additional electronic components.

More information on this acquisition: News Published in EE Times, News Published in the Wall Street Journal, Paper of Backward and Forward Integration.

5. Carnegie Steel Company constructed its Own Blast Furnaces

Carnegie Steel Company is a steel-producing company. The company needs ‘coke’ to produce steel. Several nearby suppliers own ‘blast furnaces’ to produce coke. However, these suppliers were unable to consistently meet the demand for Carnegie’s mills. Then the company moved to construct its own ‘blast furnaces’ for coke production, cutting out the dependency on their suppliers and ensuring reliable and cheap supply.

More information: Article Published about “Carnegie Steel” in Harvard Business School Digital Initiative

Understanding Backward Integration with Real Industry Examples
Understanding Backward Integration with Real Industry Examples

In-Depth Knowledge of Backward Integration

Backward integration is where a company expands across multiple supply chain segments, which are behind their 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.

This happens when a firm acquires a supplier to take advantage of specialized quality resources or start its own sourcing company. This strategy is done by the company to protect the supply of quality raw materials to gain a competitive advantage.

Backward integration is one of the best solutions if the company has a dependable source of supply.

Backward integration also creates economies of scale as the company reduces its suppliers’ expenses. The benefits of backward integration are more control of the business processes, increase competitive advantage, more control of quality raw materials, and more control of company cost. All of these benefits will result in customer satisfaction.

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