Backward Integration – Revolutionizing Business Expansion and How!
by Barsha Bhattacharya Finance 28 February 2025
Backward integration is one of the most common corporate strategies that includes a company acquiring or merging with businesses that supply raw materials. This move is quite well thought out as it helps companies acquire necessary supplies with better control over the supply chain.
The company implementing the strategy may buy a supplier of the raw materials or inventory or they may set up their own subsidiary to perform the task. The company can also acquire a manufacturer or distributor.
The following article will help you understand the strategy and implement it to your own business when necessary. This strategy is one of the most beneficial ways your company can ensure efficiency and better supply chain control.
What is Backward Integration? How Does it Work?
Backward vertical integration is one of the top strategies that businesses use to merge or acquire raw materials inventory. This is a vertical integration where businesses can acquire or merge parts or raw material suppliers.
The company produces and owns the earlier-stage inputs and may also buy them from outside companies in the supply chain. It is a strategic move that helps companies evaluate opportunities to merge or acquire suppliers.
Backward integration is one of the best options for your company if you are thinking of expanding or merging with another company. Backward integration can be capital intensive which means it requires a large sum of money to purchase the supply chain.
The supply chain starts with raw material delivery between supplier-manufacturer, which ends with the sale of a final product. The strategy uses vertical integration to boost efficiency.
Vertical backward integration allows a business to move backward in the supply chain to control raw materials. The supply chain process begins with sourcing and delivering raw materials to the manufacturer’s warehouse.
Industries with high competition makes attempts to buy suppliers as a way of cutting out middlemen. This helps them manage the increasing competition amidst the scarcity of resources.
Key Components of Backward Integration Strategy
The key components of backward integration include the following:
- Acquiring or merging with a company that supplies raw materials
- Gaining greater control over upstream supply chain
- Securing access to raw material
- Reducing dependence on external suppliers
- Achieving greater quality control over the production process
These key components help move up in the supply chain to secure the source of essential inputs for a company’s production. Breaking down the key components, we get:
- Vertical integration where the company takes ownership of multiple stages of the production process. This helps them focus on the earlier stages such as the raw materials. Thereby directly managing the suppliers.
- Reduces costs for the company as they own the source of the raw materials. As a company, they can eliminate middlemen markups and optimize logistics.
- Competitive advantage over the market as they specialize in raw materials. Backward integration helps companies gain significant advantage by securing access to these materials
- Mergers and acquisitions help them operate at an earlier stage in the supply chain
These are all the components of the process that helps optimize it. Backward integration is essential when the company wants to expand. Let’s look at the companies that commonly use this method – you may have heard of them often!
Industries That Commonly Use Backward Integration
Every company starts with the aim of going big and taking over the world. But it is only possible for a small percentage of companies to achieve that.
Here’s a list of all the different industries that often opt for this process to expand their company. Here’s a look:
1. Manufacturing and Industrial Sectors
Manufacturing and industrial sectors commonly use backward integration. It includes acquiring parts suppliers, access to crude oil, textile manufacturers who produce their own fabric.
Food processing companies do it by growing their own ingredients and electronics producers manufacture their own chips. Any industry securing a reliable supply of quality raw materials is important for production and cost control.
2. Retail and E-commerce Companies
There are several prominent e-commerce and retail companies that use this process. Netflix is another one of those retail companies that’s producing original content instead of solely relying on licensed material.
More recently, Apple began developing its own silicon chips that allow greater control over hardware performance and quality.
3. Food and Beverage Industry
The food and beverage industry takes control over one or more stages of manufacturing that precedes it. For example, Starbucks is one prime example that owns coffee farms.
Tea-producing firms in Asia own their plantations which helps them control quality and safety of their raw inputs.
4. Technology and Automotive Companies
Technology and automotive companies have recently started heavily implementing backward integration. Tesla is one of the torchbearers in this sector, paving the way for other automotive companies to produce key components such as lithium for their electric vehicle.
A few of the prime examples in the technology sector are Samsung and Qualcomm. Samsung manufactures its own OLED panels for display, whereas Qualcomm produces their own chipsets for smartphones.
Steps Involved in Implementing Backward Integration
Implementing backward integration involves several key steps that include the following:
1. Identifying Key Suppliers to Acquire or Replace
Analyzing the current supply chain to identify the suppliers with the most impact on cost, quality and delivery reliability. This will help them consider factors such as supplier concentration risk, geographic location and technological capabilities.
2. Evaluating Costs and Feasibility
This is an essential step for them that helps companies find ways to optimize costs. The company does it through conducting a thorough market analysis, assessing potential suppliers and estimating capital requirements.
Companies also do it by analyzing cost savings, evaluating operational impact and performing risk assessment.
3. Establishing In-House Production or Procurement
Implementing backward integration by establishing in-house production, the company needs several steps such as identifying the critical raw material, evaluating the feasibility.
Sourcing technology and setting up production facilities helps companies manage in-house production. In addition, it is essentially quality control implementation that helps manage supplier relationships, too.
It mainly involves strategic analysis that informs the planning and development.
Benefits of Backward Integration
Backward integration helps companies take better control over the supply chain. The following list elaborates all the different benefits companies obtain with its help:
- Quality control – Quality is one of the primary things that keeps a company running. With this process,
- Cost saving – Controlling all the aspects of production allows the company to eliminate supplier mark-ups which allows them to get volume discounts.
- Increases revenue – The company gains revenue streams from customers who buy acquired services or products.
- Increases efficiency – With the help of this process implementation, companies can improve their manufacturing process and gain direct access to the materials.
- Access to resources and markets – The company gains access to certain resources and markets such as technology or patents.
Some of the biggest names in prominent sectors implement a process such as backward integration. Their success is proof of the benefits a company can reap with its implementation.
Future Trends in Backward Integration
The process would most likely focus on greater technology, increased sustainability, integration with supply chain and vertical integration through digital platforms. Companies are looking to optimize costs, secure reliable raw materials and enhance brand reputation with the help of such control.
Here are a few key aspects of this trend:
- Sustainable sourcing – Companies will soon start prioritizing raw materials from environmentally friendly and socially responsible suppliers. They may even integrate their own sustainable production.
- Digitalizing supply chain – Leveraging data analytics will become the norm, along with IoT for monitoring and managing raw materials. It also allows collaborative product development and innovation.
- Advanced automation in manufacturing – Integrating automated systems helps optimize production process and reduces the reliance on external suppliers.
- Increases traceability and transparency – Utilizes blockchain technology that helps track the origin of raw materials throughout the supply chain.
These are all the examples of the potential future trends that will take the process forward.
Wrapping It Up!
Several large companies conduct backward integration to expand their business and become a prominent part of that sector. The process is also one of the most used ones that allows companies to expand and take over the competition.
As a business, it also allows them to control the quality of the manufactured glass and the cost of production among other prominent things. There are several big names in various sectors that have undergone significant expansion by implementing this process.
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