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Backward and Forward Integration

 
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Backward and forward integration are strategic initiatives companies may perform to reduce risks and interdependencies with external business partners in the supply chain. Fundamentally, companies may increase their control over a wider scope of the supply chain by performing backward and/or forward integration, and increase their own decision-making power over key resources and competencies important to the competitiveness of the organization.

Backward integration:
Backward integration can involve a purchase of suppliers in order to reduce supplier dependency with regard to e.g. timely deliveries, quality concerns, innovation ability etc.

Forward integration:
Forward integration is a strategy in which companies expand their activities to control the direct distribution of their products. This might be required, if companies would potentially benefit from handling e.g. the shipping of own products directly to customers, or the retail selling of own brands in brand stores.

There might be various good reasons for companies to perform either backward or forward integration, but such strategic initiatives should always add specific value to the company, and should always be aligned with the overall strategy of the company and with customer needs and wants.

This topic resembles the essence of the Transaction Cost Theory, which clearly states that companies will expand their activities and scope as long, as they will be able to perform activities more cost effective or productively than external suppliers and business partners.  

 
 
 
 
Date Created: 2011-10-21
Posted by: Admin
 
 
 

Related resources:

Reference(s)
 
The Nature of the Firm
Coase, R. H.; (1937); Economica
Keywords:
Online MBA, MBA, MSc, Online MSc, BA, University, college, Forward integration, backward integration, reduce risk, transaction cost theory, supply chain management, scm, value chain

 


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