This is an important lesson that has been missed in the past by even the best of companies like IBM. IBM failed to take control of its supply chain allowing its suppliers like Intel and Windows to prop up its competition with innovations subsidized by IBM. The company obtained exploration and production rights for the Krishna Godavari basin D6 block – India’s largest discovered gas reserves. True to form, RIL has entered the gas production business with scale & technology, signing farm-out agreements with the likes of BP and Niko to ensure production at low cost and with scale. True to its strategy of supporting the backward integration with the complete expansion of capacities and extension of products to prevent bottlenecks in the value chain – RIL invested in downstream infrastructure too.
A form of vertical integration that includes forward movement of a firm in the direction to control the distribution of its goods or services is termed as a forward integration strategy. In other words, a firm’s forward expansion in its supply chain such as the acquisition of a retailer by a manufacturer in order to have control over distribution channels is referred to forward integration. Vertical integration allows companies to lower down these costs by reducing margin. Vertically integrated companies can control costs in a closer way and generally can offer reduced prices. Also, they are able to reduce transportation costs, overhead costs, and other operational costs and by doing so, companies offer lesser prices that attract customers.
This strategy differs from backward integration in which a company tries to increase ownership over companies that were once its suppliers. In this case, companies try to control over their supply chains and try to obtain raw materials directly; eliminating the suppliers. Such an upstream movement in the supply chain is termed as Backward Integration.
These strategies are one of the major concerns while developing future plans for an organization. A corporate strategy that was followed by the company Netflix is also an example of vertical integration. Initially, the company opened up as a simple DVD rental company that used to offer a vast collection of movies through the mail. After the physical rental market went down, Netflix took the opportunity of technological advancements and started offering TV shows and movies in digital form. Then it was decided by the management of the company to raise revenue by entering into the segment of creating original content. Today, Netflix controls all areas related to the production and distribution of its original content.
- Previously, it had to use retail companies and marketing firms to effectively sell the products.
- Both are from the social media segment, and to gain market share, Facebook acquired Whatsapp to remain competitive in the social media sector.
- “During the COVID-19 pandemic time, self-reliance became need of the hour,” says Narayanan P. Nair, Vice President – International Marketing and Sales, Gharda Chemicals Ltd.
- The trading of goods and services is at costs in a perfectly competitive market.
Best buy and Walmart grocery stores have done this using a vertical integration strategy. Forward integration is undertaken by a firm through acquisition or merger with other business enterprises that were previously its customers, though the firm maintains its control over its current business. If a manufacturing firm engages in sales or after-sales channels, it is involved in a forward integration strategy. Through consolidated streamlining and management process, vertically integrated firms are able to remove overhead costs. So, by achieving greater economies of scale i.e. more production at lower costs enhances supply and reduces per unit variable and fixed costs.
Example of a Company’s Forward Integration
If you manufacture raw materials or sub-assemblies that might mean you have jumped into manufacturing. If you’re already a manufacturer, it might mean you’ve begun distributing or retailing your own product. The strategy can take a number of different looks, depending on your existing business.
Or there might be a lack of distributors, giving the distributors the power to charge more. In such cases, forward integration in the supply chain helps increase control over the distribution channels, reduce product costs and ensure strategic independence from third parties. Prior to the forward integration, the company has to depend on another company for distribution. With forward integration, the company will have more control over its distribution network with fewer external dependencies and risks. By the acquisition of such companies, competitors are not able to use the same resources and other companies are bound to find alternatives in the industry. Hurdles may be faced by the new competitors to get the production process related to raw material suppliers.
When a domestic company first begins to export to India, it is an example of A) horizontal…
There could be unforeseen human resource issues that arise after forward integration. Fred Decker learned business fundamentals at second hand as an insurance and mutual funds broker, and at firsthand as a retail store manager and the chef/proprietor of his own restaurants. He has written hundreds of business-related articles for sites including Zacks.com, Chron.com, Vitamix.com, Bizfluent and GoBankingRates and many others. He was educated at Memorial University of Newfoundland and the Northern Alberta Institute of Technology. But, DMart has consistently delivered returns to the shareholders and costumers by implementing vertical integration.
- So the company will directly sell its designs to customers instead of selling them through other retail stores.
- Businesses choose forward integration when a manufacturer decides to execute distribution and/or retail functions within the distribution channel.
- Thus in earlier cases, the Smartphone Company had to purchase a chipset from any other chipset manufacturing company, and the manufacturing costs bear a specific part of the profit the chipset manufacturer was enjoying.
A company has much better control over its supply chain’s process i.e. from raw material production to the production of finished goods by acquiring the raw material of manufacturers. Through the acquisition of raw material suppliers, the manufacturer can also gain greater control over the quality, delivery, and quantity of raw materials. Apple implemented forward integration by exclusively selling its products at its own locations or stores. By this, the company is able to have tight control over distribution and sales. Moreover, the popularity of Apple stores is also due to the expertise of its store employees in the products of the company. These employees are able to provide correct and useful advice to customers regarding the use, after-sales-service, purchases of products.
Introduction to Vertical Integration Example
The control in the supply chain is usually done through the acquisition of companies or starting a new segment in the company. Through forward integration, more sales can be achieved by bypassing wholesalers, dealers, or retailers who may not give their 100% in pushing sales of the products. For example, Google acquired Motorola Inc. because the Company Google wanted to make its mark in the Smartphone department in which it has yet to gain experience. Thus instead of going through Greenfield expansion, it has acquired Motorola through Brownfield expansion.
So, the process of supply chain generally starts with the purchasing of raw material and ends with the delivery of finished goods or final products or services to end-users or customers. This business strategy is used for a firm’s expansion by acquiring ownership of the previous distributor or supplier of the firm. It can be beneficial for the company as it gets the raw materials at reduced costs. Reduced dependency on suppliers also ensures the availability of raw materials on time.
From textile they entered precursor chemicals, plastics, petrochemicals, petroleum refining and finally to oil and gas exploration and production. By doing this, the company saves money on rentals and have better space optimization. Due to the boom in the e-commerce industry in India, many supermarket chains faced a backlash. SpaceX is a great example of Vertical Integration to lower the costs of its deliverable. By producing most of its components in house, it is able to undercut its costs largely as compared to its competitors. “During the COVID-19 pandemic time, self-reliance became need of the hour,” says Narayanan P. Nair, Vice President – International Marketing and Sales, Gharda Chemicals Ltd.
Dhirubhai Ambani had the foresight to step backwards into the manufacturing of purified terephthalic acid (PTA) which is a precursor chemical for polyester fiber used in textiles. This vision was enabled with the real-world experience gained by his son Mukesh Ambani both by studying for his MBA at Stanford, USA, and then working on RILs movement from textile to polyester staples. Setting up an on-site outlet store can be relatively quick and inexpensive, but opening a whole chain of retail outlets is not. Obviously, a company making itself less reliable on outside resources can better ensure access to the materials it needs and limit disruptions. In some cases, it might simply not be possible to implement backward integration for every needed ingredient.
Let’s understand the same with the help of a few examples and the rationale behind such integration that propel companies to go for the same. It will be interesting to see if the backward integration experience of petrochemicals, ushers in the same windfall in Reliance’s backward ventures in retail and telecom as well. While a combination of several strategies, and innovative methods have made RIL India’s leading business enterprise, backward integration has been the foundation for RILs success. The Jamnagar complex – with its large storage capacity, high refining complexity, the ability to refine any product from any quality stream of crude, and best-in-class refining margins – is a study in strategy by itself. After riding the textile bubble, when growth began to slow, RIL once again utilized backward integration to maintain its relevance and to stay ahead of the competition.
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For example, a retail or distribution company acquires a manufacturer or raw material supplier of its products. The merger of a company with its raw material supplier may result in cost-cutting as the company has all the required parts within rather than to depend on outside sources for the same. So, the big distribution or retail companies purchase manufacturers or suppliers of their products that save transportation expenses by implementing a backward integration strategy. If the implementation of a forward integration strategy is done successfully in a firm that it may lead to a competitive advantage or benefit to the company over its competitors. Key factors that support in gaining competitive advantage are reduced costs and greater control over distribution channels of the industry.
The example of technology brand Apple is the perfect example for vertical integration i.e. both forward and backward vertical integration. Apple sells its products through its retail locations forward integration example in india and has its own manufacturing facilities across the world. Apple acquired the firm AuthenTec in 2012 which develops a touch-based ID fingerprint sensor that is used for its iPhones.