Forward Integration

What Is Forward Integration?

Forward integration is a business strategy that involves a form of downstream vertical integration whereby the company owns and controls business activities that are ahead in the value chain of its industry, this might include among others direct distribution or supply of the company's products. This type of vertical integration is conducted by a company advancing along the supply chain.

A good example of forward integration would be a farmer who directly sells his crops at a local grocery store rather than to a distribution center that controls the placement of foodstuffs to various supermarkets. Or, a clothing label that opens up its own boutiques, selling its designs directly to customers instead of or in addition to selling them through department stores.


Forward Integration

How Forward Integration Works

Often referred to as "cutting out the middleman," forward integration is an 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 strategy differs from backward integration in which a company tries to increase ownership over companies that were once its suppliers.

A company implements forward integration strategies when it wants to exert a wider control over the value chain of its industry, optimize economies of scope, and target better cost structure, thereby increasing its industry market share and profitability.

The rise of the internet has made forward integration both easier and a more popular approach to business strategy. A manufacturer, 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.

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 advance along the chain while still maintaining control of its current operations—its original place in the chain, so to speak.

Key Takeaways

  • Forward integration is a business strategy that involves expanding a company's activities to include the direct distribution of its products.
  • Forward integration is colloquially referred to as "cutting out the middleman."
  • While forward integration can be a way to increase a company's control of its product and profits, there can be a danger of diluting the core competencies and business.

Special Considerations for Forward Integration

Companies should be aware of the costs and scope associated with a forward integration. They should only engage in this sort of strategy if there are cost benefits and if the integration won't dilute its current core competencies. Sometimes it is more effective for a company to rely on the established expertise and economies of scale of other vendors, rather than expand on its own.

Example of Forward Integration

For example, the company Intel supplies Dell with intermediate goods—its processors—that are placed within Dell's hardware. If Intel wanted to move forward in the supply chain, it could conduct a merger or acquisition of Dell in order to own the manufacturing portion of the industry.

Additionally, if Dell wanted to engage in forward integration, it could seek to take control of a marketing agency that the company previously used to market its end-product. However, Dell cannot seek to take over Intel if it wants to integrate forward. Only a backward integration allows a movement up the supply chain its case.