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 its value chain. The company expands to accomplish tasks that were performed by the previous levels of the supply chain.
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 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.
Key Benefits 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. This is a technique to obtain a competitive advantage and increase barriers to entry.
Why do Companies Follow Backward Integration?
- The company can identify backward integration as a way to protect the supply of quality raw materials to gain a competitive advantage. They can take advantage of specialized quality resources or start their own sourcing company.
- If the company has a dependable source of supply, backward integration is the best way to take over the supply operations.
- To create economies of scale to reduce suppliers’ expenses.
- Get more control of the business processes to improve the quality of raw materials, which resulting competitive advantage.
- Improve overall customer satisfaction.
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.
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.
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.
- Vertical Integration
- Definition of Vertical Integration
- Real Industry Examples for Vertical Integration
- Advantages and Disadvantages of Vertical Integration
- Horizontal Integration