Backward Integration

AAA

DEFINITION of 'Backward Integration'

A form of vertical integration that involves the purchase of suppliers. Companies will pursue backward integration when it will result in improved efficiency and cost savings. For example, backward integration might cut transportation costs, improve profit margins and make the firm more competitive.

By way of contrast, forward integration is a type of vertical integration that involves the purchase or control of distributors.

VIDEO

Loading the player...

BREAKING DOWN 'Backward Integration'

An example of backward integration would be if a bakery business bought a wheat processor and a wheat farm.

Vertical integration is not inherently good. For many firms, it is more efficient and cost effective to rely on independent distributors and suppliers. For example, backward integration would be undesirable if a supplier could achieve greater economies of scale and provide inputs at a lower cost as an independent business, than if the manufacturer were also the supplier.

An example of forward integration would be if the bakery sold its goods itself at local farmers markets or owned a chain of retail stores, through which it could sell its goods. If the bakery did not own a wheat farm, a wheat processor or a retail outlet, it would not be vertically integrated at all.

RELATED TERMS
  1. Economies Of Scale

    The cost advantage that arises with increased output of a product. ...
  2. Integrated Pension Plan

    A pension plan that is tied to an individual's Social Security ...
  3. Vertical Integration

    When a company expands its business into areas that are at different ...
  4. Horizontal Integration

    The acquisition of additional business activities that are at ...
  5. Acquisition Indigestion

    A slang term describing an acquisition or merger in which the ...
  6. Forward Integration

    A business strategy that involves a form of vertical integration ...
Related Articles
  1. Professionals

    What is Backward Integration?

    Integration happens when one company owns another business in its supply chain.
  2. Entrepreneurship

    Is Buying A Franchise Wise?

    If you like being your own boss, this is not the job for you.
  3. Entrepreneurship

    Reality Check: Why Startups Fail

    New ventures have only a 50% chance of making it through the first five years. Find out why.
  4. Options & Futures

    The Basics Of Mergers And Acquisitions

    Learn what corporate restructuring is, why companies do it and why it sometimes doesn't work.
  5. Economics

    Understanding Organic Growth

    Organic growth is the increase in a company’s revenue and value due to internal operations.
  6. Economics

    Explaining Market Penetration

    Market penetration is the measure of how much a good or service is being used within a total potential market.
  7. Economics

    Calculating the Marginal Rate of Substitution

    The marginal rate of substitution determines how much of one good a consumer will give up to obtain extra units of another good.
  8. Economics

    Understanding Cost of Revenue

    The cost of revenue is the total costs a business incurs to manufacture and deliver a product or service.
  9. Economics

    What is a Code of Ethics?

    A code of ethics is a collection of principles and guidelines an organization expects its employees to follow.
  10. Economics

    Explaining the Balanced Scorecard

    A balanced scorecard is a metric that measures a business’ performance.
RELATED FAQS
  1. How do I calculate the Macaulay duration of a zero-coupon bond in Excel?

    A horizontal integration consists of companies that acquire a similar company in the same industry, while a vertical integration ... Read Full Answer >>
  2. Is backward integration ever illegal?

    Backward integration occurs when a company purchases a supplier in an attempt to increase supply chain efficiency and reduce ... Read Full Answer >>
  3. What is the best reason to pursue a backward integration?

    Saving money on costs and improving efficiency are two good reasons to pursue backward integration. Backward integration ... Read Full Answer >>
  4. Is backward integration the same thing as vertical integration?

    Backward integration is a type of vertical integration, but they are not the same. Vertical integration is the process of ... Read Full Answer >>
  5. What are the disadvantages of backward integration for a mid-sized business seeking ...

    Backward integration allows businesses to obtain control over suppliers and improve supply chain efficiency. Businesses merge ... Read Full Answer >>
  6. What is the utility function and how is it calculated?

    In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Bear Market

    A market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment ...
  2. Alligator Spread

    An unprofitable spread that occurs as a result of large commissions charged on the transaction, regardless of favorable market ...
  3. Tiger Cub Economies

    The four Southeast Asian economies of Indonesia, Malaysia, the Philippines and Thailand. Tiger cub economy indicates that ...
  4. Gorilla

    A company that dominates an industry without having a complete monopoly. A gorilla firm has large control of the pricing ...
  5. Elephants

    Slang for large institutions that have the funds to make high volumes trades. Due to the large volumes of stock that elephants ...
  6. Widow's Exemption

    In general terms, a widow's exemption refers to the amount that can be deducted from taxable income by a widow, thereby reducing ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!