Backward integration refers to when a business owns a supplier in its supply chain. This form of vertical integration can be advantageous to the primary business if control of the business that is downstream the supply chain provides a guaranteed supply of inputs. Some of the most well-known examples of backward integration include Apple Inc. and Carnegie Steel.
Apple Inc. has employed a vertical integration strategy for decades. Its software products are placed into electronic devices and computer systems manufactured and assembled by Apple using hardware and components also manufactured by the company. Apple's use of backward vertical integration has been a great success and allowed the company to advance its new products and technology at a more rapid pace.
One of the first examples of backward integration was found in Carnegie Steel, which controlled many of the inputs for its steel factories. Carnegie Steel owned the mines that extracted iron ore and the coal mines, the railroads that brought the coal to the factories and the ships that brought the iron ore, and the mills that produced the steel. Through this extensive integration of the supply chain, Carnegie Steel increased its production efficiency.
Vertical integration can also work in a forward direction. Instead of owning its suppliers, a company might acquire its distributors or another company further down the supply chain that brings the company's product closer to the ultimate consumer of that product. For example, if a baker makes cupcakes and then acquires an outlet that can sell those cupcakes, she is practicing forward integration.