Forward Integration Definition with Real Industry Examples
Definition of 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.
How does Forward Integration Work?
Forward integration simply means the company takes control of the business activities ahead in its value chain. Let’s think about a shoe production company. The company produces the 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.
Why do Companies Follow Forward Integration?
There are many reasons for a company to follow Forward Integration,
- Become closer to the end consumer in the value chain, to understand the end consumer’s expectations more.
- Increase the power and ownership over the forward of their value chain.
- When the existing distributors are expensive or not meeting the company’s needs.
- If the existing retailers/distributors enjoy a higher profit margin, with a higher price of the product. The company will strategize to take over the distribution lineup to improve its profit margin and reduce the final price for the consumer.
- The company extends to the next levels of the supply chain in an effect to synergize the operations and reduce total expenses.
- If a company has the knowlage power and resources to meet the needs of the distribution channel.
Real Industry Examples of Forward Integration
Following are some real world industry examples of forward integration,
1. Nike introduces Direct-to-Consumer Sales since 2011
The sportswear giant Nike has grown Direct-to-Consumer sales since 2011 which enables them to sell their products directly to their end customers, without selling through the value chain of the outlet, retailer, distributor, wholesaler. This is an industry example of forward integration.
2. The Walt Disney Company introduced Disney+
The Walt Disney Company introduced Disney+ in 2019, which enables them to stream on-demand videos directly to their end customers.
3. Apple had Launched their own Retail Stores
Apple had been plagued with a decade of bad retail experiences at the hands of others. In 2001, Apple launched its first Apple retail store to enable its customers to buy Apple products directly from their outlets. Now Apple has many retail stores which increased customer satisfaction more.
4. McDonald’s acquired Dynamic Yield to improve their Digital Customer Experience
McDonald’s acquired a tech company called Dynamic Yield in 2019. Company plans to improve their digital customer experience touchpoints with this acquiring. The technology allows menus at McDonald’s drive-thrus to change based on different factors including weather, current traffic, and more. This is an example of forward integration.
5. Amazon introduced Amazon Prime in 2005
Amazon introduced Amazon Prime in 2005 which customers can experience free two-day delivery service for the goods purchased in a comparatively lower price. This can be considered as a forward integration which is optimizing the delivery value chain.
- Vertical Integration
- Definition of Vertical Integration
- Real Industry Examples for Vertical Integration
- Advantages and Disadvantages of Vertical Integration
- Horizontal Integration