What Is Backward Integration?

Backward integration is a form of vertical integration in which a company expands its role to fulfill tasks formerly completed by businesses up the supply chain. Companies often complete backward integration by acquiring or merging with these other businesses, but they can also do so on their own.

Companies pursue backward integration when it is expected to result in improved efficiency and cost savings. For example, this type of integration might cut transportation costs, improve profit margins, and make the firm more competitive.

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What is Backward Integration?

Understanding Backward Integration

Vertical integration is when a company encompasses multiple segments of the supply chain. A supply chain is the summation of individuals, organizations, resources, activities, and technologies involved in the manufacturing and sale of a product. The supply chain starts with the delivery of raw materials from a supplier to a manufacturer and ends with the sale of a final product to an end-consumer. Backward integration occurs when a company initiates a vertical integration by moving backward in its industry's chain.

A general example of backward integration is when a bakery business moves up the supply chain to purchase a wheat processor or a wheat farm. In this scenario, a retail supplier is purchasing one of its manufacturers, therefore cutting out the middleman, and hindering competition. 

Why Is Backward Integration So Important?

Backward integration is a very important business strategy. By executing this strategy, a company can help its bottom line. Costs can be controlled significantly from production through to the distribution process. Businesses can also gain more control over their value chain, increasing efficiency and gaining direct access to the materials that they need. In addition, they can keep competitors at bay by gaining access to certain markets and resources, including technology or patents.

Difference Between Backward Integration and Forward Integration

By contrast, forward integration is a type of vertical integration that involves the purchase or control of distributors. An example of forward integration is if the bakery sold its goods directly to consumers at local farmers' markets, or if it 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.

Potential Issues With Backward Integration

Vertical integration is not inherently good. For many firms, it is more efficient and cost-effective to rely on independent distributors and suppliers. 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, rather than if the manufacturer were also the supplier.

A Real-World Example of Backward Integration

Many large companies and conglomerates conduct backward integration.

Amazon.com Inc., for example, became vertically integrated backward when it expanded its business to become both a book retailer and a book publisher. Amazon began as an online book retailer in 1995, procuring books from publishers. In 2009, it opened its own dedicated publishing division, acquiring the rights to both older and new titles. It now has several imprints. Although it still sells books produced by others, its own publishing efforts have boosted profits by attracting consumers to its own products, helped control distribution on its Kindle platform, and given it leverage over other publishing houses.