They can take advantage of specialized quality resources or start their own sourcing company. These strategies are one of the major concerns while developing future plans for an organization. Whether the company produces raw material internally or acquires another company, it costs less to have raw material directly than purchasing it from other companies. One of the most common ways to achieve backward integration has been through a merger or acquisition. A manufacturing company often acquires or merges with another company, the supplier of raw material.
The company gains control over the raw materials using the backward integration method. The primary advantage of backward integration is the better control it provides over the production process. By managing raw materials and inventories better, companies can get more value from this process. Similarly, they gain control over the quality of raw materials that go into producing the end product. Companies also can get goods on time, which can help with quality control.
Additionally, conglomerate backward integration example in india can lead to cost savings and operational efficiencies. Therefore, it is important for companies to carefully consider whether or not a conglomerate merger is the right growth strategy for them. Backward integration is a critical piece of any business’s strategy. By understanding the advantages and disadvantages of backward integration, you can make a more informed decision about whether or not it is suitable for your company. This helps them ensure that they can maintain a high level of control over how their products are presented to consumers and their quality. It also allows them to manage better the distribution of their products, which can help increase sales.
Backward integration: Big companies go on self-sufficiency drive
Through its various divisions, Samsung is actively involved in the manufacture of various components, such as LCD and AMOLED displays, antennas, Li-ion batteries, camera modules, and semiconductors. Let’s understand the same with the help of a few examples and the rationale behind such integration that propel companies to go for the same. It leads to higher costs if new activities are not managed properly. There is a synchronization of supply and demand and proper coordination in the supply chain. Flipkart, an e-commerce company, has its customer service functions instead of outsourcing them to improve customer experience.
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A strategic case can be made for backward integration if the nature of competition across two adjacent activities in the value chain is markedly different. Reliance Industries demonstrated this throughout the 1980s in the most telling manner possible. Until the 1970s, Reliance was one of 100 other players in the synthetic yarn and textiles business. True, its capacity for managing the regulatory environment did give it some advantage in sourcing its requirement of imported raw material over its rivals in the fibre and textile business.
The company integrated backwards by making a foray in to polyester filament yarn business. Fiber and yarn come from petrochemicals accordingly the company moved further backward and entered in the petrochemical business and later into plastics. Reliance’s backward integration did not stop at the petrochemicals rather it moved back into petroleum refining. The raw material for the petroleum refining is crude oil which is to be explored. To complete the entire chain, Reliance’s backward integration did not stop here rather it went on to integrate backward by moving into oil and gas exploration.
Backward Vertical Integration
Companies pursue backward integration when it is expected to result in improved efficiency and cost savings. For example, backward integration might cut transportation costs, improve profit margins, and make the firm more competitive. Costs can be controlled significantly from production through to the distribution process. Businesses can also gain more control over their value chain, increasing efficiency, and gaining direct access to the materials that they need. In addition, they can keep competitors at bay by gaining access to certain markets and resources, including technology or patents.
The two companies have no business overlap and are in entirely different industries. Mixed conglomerates occur when two companies merge even though they have some business overlap. For example, a company that owns a chain of hotels may merge with a company that owns an airline. The two companies have some business overlap, but they are still considered in different industries. Many hotels produce their food and beverages and provide housekeeping and other services. This allows them to maintain control over quality and pricing while still providing guests with a high level of service.
Therefore, balanced integration involves two transactions – one downstream and another upstream. As the world of business becomes increasingly globalized, companies are finding that they need to adopt new strategies to stay competitive. Balanced integration is quite simply a combination of both backward and forward integration. Apple’s acquisition of Beats Electronicsgave Apple ownership of the entire supply chain, from product design to manufacturing to distribution.
Lack of competition
However, the strategy should be adopted and executed carefully as it may come with disadvantages as well. Excessive control over input items may result in a lack of innovation and productivity of a company. It may result in increased operational inefficiency instead of increased efficiency. The manufacturer can concentrate on its product differentiation policy when input material is readily available through increased control over the supply side.
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Forward means move forward, as the https://1investing.in/ system has two parts one is backwards and another one is forward. Our web design services help you in stand out from the crowd, increase your ROI and credibility. The Structured Query Language comprises several different data types that allow it to store different types of information… “We’re setting up a glass tubes plant as we were becoming too vulnerable to our suppliers.” “Producing monoethyl glycol will give us the flexibility to sell it if the polyester staple fibre market is down.”
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The rush continues-clearly a case of one step backwards being two steps forwards. To assure that backward integration is going in the correct direction, the company will have to make some huge improvements in the process. That can be an additional burden for the company balance sheet and can often result in several debts for the company.
Suppose if Foxconn does the work of Apple i.e. if it starts selling Iphone without distributing it to Apple. Meanwhile it will be able to sell Iphone directly to the customer, manufacturing it and directly selling it to customer. If used correctly, the strategy can produce the best results for the company as well as the people working in it by reducing several costs and providing other benefits. Carnegie Steel is one of the firstfamous examples of backward integration implementation.
In other words, the company moves “upstream” to control more of the sources of its raw materials and components. Backward integration is the process of taking control of the supply chain side of a business. It can be achieved by producing the input supplies for production internally or by acquiring the supplier company. Disney’s story is not too different, either, although its vertical integration strategy is arguably more aggressive and diverse.
- The brand ‘Vimal’ is included to enhance the deal’s attractiveness.
- Companies pursue backward integration to gain control of their supply chain.
- A vertical merger is the merger of two or more companies that provide different supply chain functions for a common good or service.
- It will gain access to the production units and distribution chain and thus market itself differently from its competitors.
- Backward integration can remove the need for middlemen and hence will cut the cost, which is required in the process as well.
In this scenario, a retail supplier is purchasing one of its manufacturers, therefore cutting out the intermediary, and hindering competition. ClearTax offers taxation & financial solutions to individuals, businesses, organizations & chartered accountants in India. ClearTax serves 1.5+ Million happy customers, 20000+ CAs & tax experts & 10000+ businesses across India. A backward integration example could be a bakery that buys a wheat processor or a wheat farm.
Upfront, meanwhile, Samsung-branded stores sell their products direct to customers offline. It has sales networks in over 70 countries that distribute the company’s mobile phones, as well as other consumer electronic products such as televisions. With a broad portfolio of consumer devices requiring assembly, Apple is considered an industry leader in supply chain management. However, the main bulk of the company’s integration is actually on the distribution and retail side of the equation, with the vast majority of Apple’s sales coming through their self-branded stores. Similarly, the company has also done forward integration by opening its retail stores popularly known as Apple Stores to sell its entire product offering.
Let’s take furniture store as an example of forward integration, which has its own manufacturing, control over the distribution/retailer. As it cuts out the middleman, it can easily offer a product with the brand name at a much lower price. Furthermore, they offer a wider range of products at the best price than you can get from the regular retailer. The process leads to lack of supplier competition that will lead to low efficiency resulting in potentially higher costs.
Barrier to entry for new player-
This company uses both backwards and forwards integration for better productivity. In conclusion, I must say that you have clear information about all. So backwards integration and forward integration are two types of vertical integration strategies. Backward integration and forward integration both are the two types of vertical integration.
However, when the scale increases to a very high level, the integration may cause a lot of inefficiencies, therefore increasing the scale is not always a good idea and may not always be advisable. There are a number of effective trading tactics you will come across when trading on the financial markets… Since the strategy approach centralized model and diversification of business, It’s gets difficult for a new business to compete with it. The company’s current providers are particularly uncertain or unfit to address the issues.