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. Horizontal Integration

    The acquisition of additional business activities that are at ...
  3. Forward Integration

    A business strategy that involves a form of vertical integration ...
  4. Vertical Integration

    When a company expands its business into areas that are at different ...
  5. Acquisition Indigestion

    A slang term describing an acquisition or merger in which the ...
  6. Integrated Pension Plan

    A pension plan that is tied to an individual's Social Security ...
Related Articles
  1. Is Buying A Franchise Wise?
    Entrepreneurship

    Is Buying A Franchise Wise?

  2. Reality Check: Why Startups Fail
    Entrepreneurship

    Reality Check: Why Startups Fail

  3. The Basics Of Mergers And Acquisitions
    Options & Futures

    The Basics Of Mergers And Acquisitions

  4. How Influential Economists Changed Our ...
    Fundamental Analysis

    How Influential Economists Changed Our ...

comments powered by Disqus
Hot Definitions
  1. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  2. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
  3. Days Payable Outstanding - DPO

    A company's average payable period. Calculated as: ending accounts payable / (cost of sales/number of days).
  4. Net Sales

    The amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any ...
  5. Over The Counter

    A security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, etc. The phrase "over-the-counter" ...
  6. Earnings Before Interest After Taxes - EBIAT

    A financial measure that is an indicator of a company's operating performance. EBIAT, which is equivalent to after-tax EBIT ...
Trading Center