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Progressive companies use that data as part of their strategic planning process as well as the planned execution of that strategy. IT enables companies to track sales data, expenses and productivity levels. It helps capture every interaction a company has with a customer, so that a more enriching experience is possible.
When we talk about backward integration, we also name it as vertical integration, and that is achieved when the company includes different segments of the supply chain. With the help of backward integration, a company will be able to cut costs of transportation, make improvements in profit margins, and provide a competitive edge to their brand and business. India is currently going through an E-commerce boom, and as it is developing at such a fast rate, a traditional model of manufacturing and distribution simply won’t be able to keep up with the demand. Vertical integration is a way for companies to make themselves leaner and create the best consumer experience possible.
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That’s why Quantified Commerce owns its own factories and is looking into buying their own trucks. Similarly, Disney acquires lots of retail stores so that they can sell its Disney character. It is also well known for its vertically integrated into both sides. However, not all companies use those techniques because larger is not always nicer. Because both techniques have some advantages and disadvantages as I already indicated above. If I talk about backward integration, this is a strategy of the business.
For example, lack of supplier competition can reduce efficiency and thus result in higher costs. Further, it will be an extra burden on the Company if it cannot achieve the economies of scale that the supplier can achieve individually and produce goods at a lower cost. Vertical IntegrationVertical integration is a corporate approach to take charge of its value chain or supply chain functions. It is the process of holding and managing the distributors, suppliers and retail locations at the company’s discretion. Backward integration strategy doesn’t impact an organization’s distribution channels, unlike forward integration.
«Producing monoethyl glycol will give us the flexibility to sell it if the polyester staple fibre market is down.» CFI is the official provider of the Financial Modeling and Valuation Analyst ™ certification program, designed to transform anyone into a world-class financial analyst. INVESTMENT BANKING RESOURCESLearn the foundation of Investment banking, financial modeling, valuations and more.
Case Study: Backward integration in Pharmaceutical Business
Backward integration are understood if we look closely at the production levels and technologies behind them. The production process is divided into three stages—assembly, sub-assembly and component stage. This was not the last time RIL would demonstrate this capacity to move the company forwards by moving the business backward along the value chain. Backward Integration has been the foundational practice and hallmark of how RIL has become India’s leading business enterprise in the last 2 decades. If you look at RIL, you can easily observe how it transcends the entire value chain – right from obtaining the resource to its transformation into multiple goods and services. Very few companies across the globe straddle the Energy, Chemicals, and Resources sectors the way Reliance does.
Being able to produce its raw materials, the company will be able to have continuous raw materials supply. Therefore company would not rely on other sources for their backward integration example in india supplies. This will eliminate possible interruption in the production cycle and minimize possible differences when comparing production cost with budgeted.
So in this blog, you will know everything about backward integration and forward integration. Also, you will understand the different strategies and examples of companies. Performance Marketing services will help you grow your business by providing real results and ROI. With encouragement from the Government forthcoming, many companies have decided that the advantages of backward integration far outweigh the disadvantages. The rush continues-clearly a case of one step backwards being two steps forwards.
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«Backward integration gives you a certainty about raw materials. So Ceat is setting up a nylon tyre chord plant.» J.K. The synthetic yarn and fabric company is investing Rs 850 crore in an aromatics complex which will enable it to produce purified terephthalic acid , a crucial raw material for its products. Then the company will no longer be at a disadvantage vis-a-vis competitor Reliance Industries, which has its own PTA plant. While backward integration is the merging and acquisition of companies in the upper side of the supply chain, forward integration is the acquisition of companies on the lower part of the supply chain. In forward integration, the company is interested in acquiring distributors of its products or the retail stores that sell the final products to the end consumer.
Imagine a hypothetical scenario where a single supplier is responsible for supplying materials to two companies, but one purchases the supplier and stops providing goods to the competitor. In this case, the competitor would either have to arrange supplies itself or exit the market. Consolidating the supplier stage of the supply chain by integrating backward would also increase the barriers to https://1investing.in/ entry for new competitors. The company can identify backward integration as a way to protect the supply of quality raw materials to gain a competitive advantage. They can take advantage of specialized quality resources or start their own sourcing company. One of the first examples of backward integration was found in Carnegie Steel, which controlled many of the inputs for its steel factories.
- The further back a company moves in merging the supply chain to manufacturing is called backward integration.
- In some instances, two adjacent value-creating activities are so integral to one another that vertical integration seems to most logical thing to do.
- Consolidating the supplier stage of the supply chain by integrating backward would also increase the barriers to entry for new competitors.
- Advantage of backward integration is that by integrating with suppliers, organizations can control their supply chain from the production stage.
- Many people might still doubt the importance of the backward integration strategy, and this part of the article is going to clear out all the doubt that they have.
Right now IKEA uses both of them to capture the overall market. Our web design services help you in stand out from the crowd, increase your ROI and credibility. Acer’s product range includes laptop and desktop PCs, tablets, smartphones, monitors, projectors, etc. The synergies of this business activity were to produce semiconductors and additional electronic components. A tycoon is a prominent figure in a particular industry who has built up substantial wealth and power while building their business empire.
Backward Integration Examples
It fills their inventory only when there is 20% of their stock is left or even less. To keep this model efficient, it needs an simple supply chain network. So It decided, when supply chain is so important element of their management then why to be dependent to any other network why not to own it.
But the major benefit of vertical integration is its reduction in costs to the consumer and to the company. «Since we own everything, we are able to standardize everything,» says Andreas. «We can have faster loading/unloading, and have a quicker turnaround in comparison to most companies, which lowers our capital requirements.»
But here we are going to talk about the actual advantages that this strategy can have on the business. So, those who want to have an idea about the process and how it can help the business need to read this part to know more. Many people might still doubt the importance of the backward integration strategy, and this part of the article is going to clear out all the doubt that they have. Instead of acquiring or buying a company, if Ford starts manufacturing all the iron and steel components on its own, then it would also be termed as Backward Integration. This is especially true in India, a nation with extremely fragmented logistics.
IKEA. The organization purchased 83,000 hectares of forests in Romania to supply its timber requirements. This is the first time that a furniture organization is managing an entire forest. IKEA has sealed the deal for managing wood sustainably at affordable prices. Netflix was a platform to distribute films and TV shows created by others. Netflix streams more original content reducing their dependency on film studios and their licensing.
Business Model
Backward integration builds up excess upstream capacity to ensure that downstream has adequate supply during heavy demand. Backward integration strategy when they feel a supplier has too much power over them. The complex turned the west coast of India into Asia’s largest refining hub, with Jamnagar itself processing 1.24 million barrels of crude per day into a wide variety of petrochemicals.
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