A:

Saving money on costs and improving efficiency are two good reasons to pursue backward integration. Backward integration is the process of acquiring a company that lies somewhere behind it on the production line for the business that purchases the company. One area in which the business may be improved through this type of integration includes saving money on transportation costs to move goods from one location to another.

It is not always advisable to pursue backward integration, as it does not always result in saving money or making business processes more efficient. Backward integration is a form of integration known as vertical integration, which is simply expanding the business to an area that is related to the production of the company. A similar form of integration, known as forward integration, involves expanding the business to an area that is forward in the production line for the company. Acquiring the supplier for a company is an example of backward integration. Acquiring the distributor for a company is an example of forward integration.

Vertical integration involves controlling a business that is either closer to or further away from the customer. The more a business controls an aspect of its company through backward integration, the less the transactions in that integration are related to the customer. Forward integration involves making changes to control factors that are closer to the customer end of business. An example of backward integration is a food company that purchases the farm from which it receives the goods it needs to make products. This purchase does not affect the customer very closely. An example of forward integration is choosing to sell products at one particular vendor over another in order to reach a certain customer or give the customer certain options.

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