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.

INVESTOPEDIA EXPLAINS '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. Vertical Integration

    When a company expands its business into areas that are at different ...
  3. Integrated Pension Plan

    A pension plan that is tied to an individual's Social Security ...
  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. Entrepreneurship

    Is Buying A Franchise Wise?

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

    Reality Check: Why Startups Fail

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

    The Basics Of Mergers And Acquisitions

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

    What is a roll-up merger and why does it occur?

    Find out what a roll-up merger is and how it is executed. See why roll-ups might bring added efficiency and competition into a fragmented market.
  5. Economics

    What are the differences between internal and external economies of scale?

    Take a deeper look at the differences between internal and external economies of scale, and learn why internal economies offer more competitive advantage.
  6. Economics

    How does marginal cost of production relate to economies of scale?

    See how marginal cost of production relates to economies of scale, and why every company should be concerned with reducing its marginal costs.
  7. Professionals

    How do companies measure labor supply in human resources planning?

    Find out how and why a company's human resources department would measure labor supply, and what policies would address a shortage or surplus.
  8. Economics

    What is a diseconomy of scale and how does this occur?

    Take a deeper look into diseconomies of scale, the economic phenomenon that can make companies less efficient as they become too large.
  9. Economics

    What is backward integration and how does it relate to economies of scale?

    See how a firm can realize greater economies of scale by engaging in backward integration mergers with one or more of its suppliers.
  10. Economics

    How do economies of scale work with globalization?

    Discover how globalization can lead to unprecedented economies of scale for firms across the world, leading to higher global efficiency and productivity.

You May Also Like

Hot Definitions
  1. Multiplier Effect

    The expansion of a country's money supply that results from banks being able to lend. The size of the multiplier effect depends ...
  2. Command Economy

    A system where the government, rather than the free market, determines what goods should be produced, how much should be ...
  3. Prospectus

    A formal legal document, which is required by and filed with the Securities and Exchange Commission, that provides details ...
  4. Treasury Bond - T-Bond

    A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest ...
  5. Weight Of Ice, Snow Or Sleet Insurance

    Financial protection against damage caused to property by winter weather specifically, damage caused if a roof caves in because ...
  6. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
Trading Center