Backward Integration Explained – with Real Industry Examples

Definition of Backward Integration

How does Backward Integration Work?

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.

Backward integration is also known as when 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.

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

Why do Companies Follow Backward Integration?

Real Industry Examples of Backward Integration

1. Netflix Started their Own Production and Shows

Netflix then started to develop their own production and shows which is a real-world industry example for backward integration.

More information and reference: History of Netflix- Founding, Model, Timeline, Milestones –

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, Article Published in, 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

How Company Grows with Backward Integration

  • Strategic Planning and Assessment
    The journey begins with strategic planning and assessment of the company’s supply chain needs and capabilities. This involves identifying critical components or raw materials that are currently sourced externally and evaluating the potential benefits of producing them in-house. For example, a watch manufacturer might assess the feasibility of producing its own watch movements to reduce dependency on external suppliers and improve production efficiency.

  • Acquisition or Development of Production Facilities
    Once the decision is made to pursue backward integration, the company may choose to acquire existing suppliers or develop its own production facilities. Acquisitions can provide immediate access to expertise, technology, and established market presence, while internal development allows for tailored solutions aligned with the company’s specific requirements. For instance, acquiring a company specializing in watch movement production or building a dedicated facility can enable the watch manufacturer to control quality and streamline production processes.

  • Implementation of Quality Control Measures
    Implementing stringent quality control measures becomes crucial with production capabilities in place. The company establishes standards and protocols to ensure that the manufactured components meet high-quality standards consistent with its brand reputation. This step not only enhances product quality but also boosts customer confidence and satisfaction.

  • Cost Efficiency and Supply Chain Optimization
    Backward integration typically results in cost savings by eliminating supplier markups and reducing logistics costs associated with external procurement. By optimizing the supply chain, the company improves operational efficiency and financial performance. For example, producing components internally can lead to lower production costs and improved profit margins, contributing to overall growth and sustainability.

  • Enhanced Innovation and Flexibility
    Controlling production processes empowers the company to innovate more freely. With in-house capabilities, the company can experiment with new materials, technologies, and production methods. This fosters continuous improvement and innovation, allowing the company to stay ahead in a competitive market landscape. Moreover, the flexibility gained from internal production enables quicker response to market demands and changes in consumer preferences.

  • Strategic Differentiation and Competitive Advantage
    Over time, backward integration can position the company uniquely in the market. By offering products with superior quality, reliability, and innovation, the company strengthens its competitive advantage. Customers recognize the value of vertically integrated products, which may command premium pricing and increase market share. This strategic differentiation not only drives growth but also solidifies the company’s market position against competitors.

Key Benefits / Advantages of Backward Integration

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. Following are some key benefits of backward integration,

Key Drawbacks / Disadvantages of Backward Integration

Effects of Backward Integration

Difference between Acquisition Strategy and In-House Build

Backward Integration vs Forward Integration

Backward Integration vs Vertical Integration

FAQs of Backward Integration

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