What is Forward Integration?
It’s the opposite of backward integration, in which a company acquires or merges with businesses up the supply chain, such as raw materials suppliers.
Forward integration can be thought of as downstream vertical integration as it proceeds along from the point at which a company produces its goods to the point at which its goods are sold to end users or consumers. Forward integration differs from backward, upstream vertical integration in this way, as upstream integration involves controlling the supply of parts, materials, and services needed to produce a given product.
Examples of forward integration
Generally, forward integration involves cutting out a “middleman,” or another business that’s involved in the supply chain between production and delivery to the end consumer. One example of forward integration is a clothing manufacturer that opens its own retail stores to sell products directly to consumers rather than to boutiques or other retail businesses.
Another example of forward integration is a consumer goods manufacturer that builds a distribution network of regional warehouses, allowing the company to bypass selling to wholesalers and instead sell directly to retailers.
Other examples of forward integration include mergers and acquisitions of downstream businesses. One well-known real-world example of forward integration is Amazon’s purchase of Whole Foods for $13.7B, allowing it to expand into brick-and-mortar stores to sell food products to consumers through retail stores rather than exclusively through e-commerce.
Advantages of forward integration
Forward integration can help businesses improve along multiple lines, such as:
- Reducing competition — Forward integration makes it more difficult for a given company's competitors to gain a foothold in their niche. A company can bar potential competitors from accessing the same distribution centers they control and solidify their stance in the market. This competitive advantage can make it impossible for other businesses to destabilize a company's growth or carve away at their share of the market.
- Controlling distribution — Businesses that implement a forward integration strategy can achieve near complete control of their products' distribution. This allows for greater independence in setting prices and accommodating consumer interests. Businesses that use forward integration to expand their operations can also sidestep extortionate third-party distribution fees and inadequate distribution channels.
- Reducing product prices — As a business gains more control over its production and distribution processes, it can lower pricing on its products across the board to match savings on third-party fee structures. This is often done as a simple way to penetrate deeper into the market.
Risks of forward integration
Forward integration can be very beneficial for some types of companies, but it is not always the right strategy to adopt. For example, acquiring or merging with other businesses downstream in the supply chain can lead to increased management complexity, resulting in inefficiencies.
Forward integration can also involve substantial investment costs to acquire downstream businesses. If a company isn’t confident that the benefits will outweigh the investment cost, forward integration may not be the ideal strategy.
A type of vertical integration, forward integration is when a company acquires other businesses that handle downstream aspects of their supply chain, such as businesses that handle distribution, or expands its operations to manage those business processes directly. Forward integration offers several advantages, from gaining a competitive advantage to having greater control over costs.
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