What is 'Forward Integration'
Forward integration is a business strategy that involves a form of vertical integration whereby business activities are expanded to include control of the direct distribution or supply of a company's products. This type of vertical integration is conducted by a company moving down the supply chain. A good example of forward integration is when a farmer sells his crops at a local grocery store rather than to a distribution center that controls grocery store placement.
BREAKING DOWN 'Forward Integration'
Forward integration is a operational strategy implemented by a company that wants to increase control over its suppliers, manufacturers or distributors, so it can increase its market power. For a forward integration to be successful, a company needs to gain ownership over other companies that were once customers. This differs from backward integration in which a company tries to increase ownership over companies that were once its suppliers.
The Supply Chain Involved in Forward Integration
The goal of forward integration is for a company to move forward in the supply chain, increasing its overall ownership of the industry. Standard industries are made up of five steps in the supply chain: raw materials, intermediate goods, manufacturing, marketing and sales, and after-sale service. If a company wants to conduct a forward integration, it must move forward in the chain while still maintaining control of its initial place.
For example, the company Intel supplies Del with intermediate goods - its processors - that are placed within Del's hardware. If Intel wanted to move forward in the supply chain, it could conduct a merger or acquisition of Del in order to own the manufacturing portion of the industry. Additionally, if Del wanted to engage in a forward integration, it could seek to take control of a marketing agency that the company previously used to market its end-product. However, Del cannot seek to take over Intel if it wants to integrate forward. Only a backward integration allows a movement up the supply chain.
The Reasoning for a Forward Integration
A company implements forward integration strategies when it wants to realize economies of scale and increase its industry market share. The rise of the Internet has made forward integration both easier and a more popular approach to business strategy. A manufacturing company, for example, has the ability to set up an online store and use digital marketing to sell its products. Previously, it had to use retail companies and marketing firms to effectively sell the products.
However, prior to initiating a forward integration, companies should be aware of the costs and scope associated with this type of strategy. Companies should only forward integrate if there are cost benefits and if the integration won't dilute its current core competences.