Forward Integration

Updated on May 7, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What is Forward Integration?

Forward integration is a strategy adopted by businesses to reduce production costs and improve the firm’s efficiency by acquiring supplier companies and, therefore, replacing the third party channels and consolidating its operations.

Key Takeaways

  • Forward integration is an idea businesses utilize to cut production costs and enhance the firm’s capability through acquiring supplier companies. Thus, it replaces the third-party channels and combines the operations.
  • The advantages of forward integration are low costs due to the market transaction costs elimination, a decline in transportation expenses, supply and demand and proper coordination in the supply chain, more significant market share, strategic independence, and creating an entry barrier to potential competitors.
  • The main objective is meeting a larger market share, and companies expand their distribution or enhance product placement.

Forward Integration

Explanation

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Forward Integration Explained in Video

How does Forward Integration work?

Forward Integration Example

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Let us see an example. Company Intel supplies the company DELL with processors, which are intermediate goods placed within DELL’s hardware. If Intel decides to move forward in the supply chain, it may think of a mergerMergerMerger refers to a strategic process whereby two or more companies mutually form a new single legal venture. For example, in 2015, ketchup maker H.J. Heinz Co and Kraft Foods Group Inc merged their business to become Kraft Heinz Company, a leading global food and beverage firm.read more or acquisition of DELL to own the manufacturing portion of the industry.

Again if DELL wants to implement this strategy, it can take control over the marketing agency that the company previously used to market its end product. If Intel decides to follow them, then, in the long run, it can operate as a monopoly and dominate the market by controlling both raw material and finished product. Buy DELL cannot take over Intel if it plans to integrate forward because only a backward integration allows a movement up the supply chain.

When to Follow Forward Integration?

Amazon’s Example – WholeFoods Acquisition

Forward Integration

source: money.cnn.com

  •  Amazon’s purchase of whole foods is one of the highest-profile examples of forwarding integration strategy in the current years.
  • Amazon publishes the book itself and provides a publishing platform for independent writers.
  • It also has its transportation (Amazon Transportation Services) and distribution, which is forward and backward integration-toward suppliers-and forward integration because Amazon directly delivers to the end-users.
  • It is a brick and mortarBrick And MortarBrick and Mortar is a kind of business that offers goods and services to its customers face-to-face through a physical outlet. It represents a physical presence of a business. read more Whole Foods outlet for Amazon. The Whole Foods outlets act as places to sell their products or have the customers pick them up at their convenience.
  • Amazon was already in the grocery business in a small way, but this acquisition made Amazon a top player in the market. Shares of traditional food retailers fell to new lows because Amazon could shake up the industry.
  • Similarly, DELL sells online directly to the customers, and Apple has its stores to reach out to the customers, which are also good examples of such integration strategy.

Top Examples of forwarding Integration Strategy

Key Differences between forwarding and Backward Integration

Forward IntegrationBackward Integration
Here the company acquires or merges with a distributor.Here the company acquires or merges with the supplier or manufacturer.
The main objective is to achieve a larger market share.The main objective of backward integration is to achieve economies of scale.
Here the companies are looking to expand their distribution or improve the placement of their products in the market.Involves internal steps to reduce overall dependency on suppliers and service providers.
Gives control over the supply chain;Gives control over purchasing power;

Advantages

Disadvantages

  • It leads to higher costs if new activities are not managed properly.
  • It may lead to lower product quality and reduced efficiency due to competition.
  • Increased bureaucracy and high investments may lead to lesser flexibility.
  • The inability to offer product variety as in-house efficiency and skillsets are required.
  • Possibilities of monopoly arise.
  • Organizational structure may become rigid due to the shortcomings of such implementations.

Frequently Asked Questions (FAQs)

What factors are to be considered when deciding on forward integration?

Factors to consider during this integration involve the potential impact on existing business relationships, the availability of suitable acquisition targets, the cost of building or acquiring new capabilities, and the risks and benefits of the strategy.

What comes under the threat of forward integration?

The threat of forward integration is in Business-to-Business (B2B) connections. For example, it happens if a manufacturer is pressured to sell directly to a consumer or retailer. Therefore, such threats typically apply to companies operating in industries with significant power asymmetry between upstream and downstream firms.

What is the impact of forward integration?

The impact of forward integration depends on various factors. However, the potential impact of these integrations includes increased control, cost savings, competitive advantage, disruptive influence, resource requirements.

This article has been a guide to forwarding Integration and its definition. Here we discuss how forward integration works, along with examples (Amazon-Whole Foods acquisition) and integration strategies. Also, we discuss their advantages and disadvantages. You can learn more about Corporate finance from the following articles –

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