A supply chain is the summation of individuals, organizations, resources, activities and technologies involved in the manufacturing and sale of a product.
It means taking ownership of multiple steps in your production process, so you have better control over your product or your costs. It's a high-risk strategy — there are a lot of things that can go wrong — but when it works, it can give you a substantial advantage over your competitors. Vertical Goes Both Ways There are two ways to integrate vertically.
If you extend your business in the direction of your ultimate customers, it's referred to as forward or downstream vertical integration. If you extend back through your own supply chain, it's called backward or upstream integration. Integrating in each direction has advantages and eventually, you might choose to become completely integrated, from producing your own raw materials to selling directly to your end users.
If you're the hands-on, product-oriented type, integrating backward can be appealing because it gives you more control over your process. You should always have a clear strategic reason for your acquisitions, though. Securing Your Supply If you're in a competitive market for your raw materials or components, securing your supply of those materials is one clear reason for backward integration.
This can happen on a surprisingly small scale: If you sell jams and jellies made from local berries, for example, you might find it's worth your while to buy a berry farm rather than compete with others for a limited supply of local product.
It means you won't have to worry about a rival snapping up everything available, or a farmer deciding to do business with a competitor instead of you. Stabilizing Your Prices Getting some certainty over costs is another good reason for backward integration, and in some ways, it's part and parcel of securing your supply.
If you aren't in a competitive bidding situation, that in itself helps keep your prices stable. The relationship between supply and demand is one of the most basic principles of economics, and controlling your own supply insulates you from changes in market demand and market pricing. Reducing Your Costs Owning more of the supply chain may also reduce your overall production costs.
Every transaction with a middleman means you're dealing with somebody who also needs to make a profit, and if you can eliminate a few of those markups, it can give you a cost advantage over competitors who aren't vertically integrated. This can be a trap for the unwary, though.
When you buy out a supplier, you're betting that you can operate your new business at least as efficiently as the people who've been doing it all along. That isn't necessarily a given, especially if you lose a few key employees. Do Your Diligence Integrating vertically means you'll put a lot of your money into acquiring or starting up a new company, so it's important you do your due diligence.
If the company you buy operates at a disadvantage against its competitors — a location with poor shipping options or high utility costs, maybe — you'll inherit the same problems.
If your new acquisition has outdated equipment or inefficient processes, or if your financing costs are too high, you may find that your costs at the end of the day don't justify the investment you've made. Even worse, you may find that you're simply unable to match the low production costs of major players in the field.
You can buy your own woodlot and mill, but it doesn't mean your lumber will necessarily be cheaper than you could buy at Lowe's or Home Depot. The biggest risk of all is that you'll put so much of your time and financial resources into the new enterprise that your original business suffers as a result.Backward integration secures resources at a lower price than competitors, while forward integration secure customers or outlets and ensuring product preference and it can give a firm better control above its marketing attempt%(1).
Vertical Integration Essay Vertical Integration Vertical Specifically there are two types of vertical integration, backwards and forward integration. Backward or upstream integration is when a firm takes command of a function that its suppliers previously managed.
For example if Dell were to. Jun 29, · Forward integration makes the most sense when you're clearly leaving money on the table if you don't do it. If shipping costs are killing you, for example, you're likelier to benefit from buying. INT'l MKTG Exam 2.
STUDY. PLAY. joint venture. backward integration involves. entry into activities previously performed by suppliers or other enterprises position along earlier stages of the industry value chain system.
forward integration involves.
entry into value chain system activities closer to . Jun 29, · Backwards vertical integration means you acquire or start businesses that can provide you with the raw materials or sub-assemblies you use in your main business.
Backword N Forword Integration Essay Sample. Backward Integration A form of vertical integration that involves the purchase of suppliers. Companies will pursue backward integration when it will result in improved efficiency and cost savings.