A company could also pursue a balanced integration approach, expanding its reach in both directions. Apple has used the vertical integration strategy for 35 years and is one of the most successful companies in the technology industry. Apple centered its business strategy on its own development of integrated hardware, software, and latterly services. They design most of their products in-house, and does not allow their hardware and operating system to be licensed out, with this strategic allowing the company to apply its company vision to its products.
What is backward integration quizlet?
Backward Integration. A form of vertical integration where the company integrating channel operations moves upstream, toward manufacturing. Brokers (Agents) Representatives of one or more manufacturers who sell products on their behalf to consumers, wholesalers, and distributors but do not take title to them.
But in the case of vertical integration, the field of business spreads, and there is an emergence of different business functions. With horizontal integration, a company is expanding its reach in its existing area of core competency (say, a manufacturer acquiring another manufacturer or an accounting firm acquiring another accounting firm). For any given organization, full vertical integration can mean one of two things. Most often, it refers to an organization that seeks to acquire or build all the assets, resources, capabilities and skills necessary to take over one entire step in its supply chain, either upstream or downstream.
Vertical Integration
The Walt Disney Company’s launch of the Disney+ streaming service, which allows it to deliver its entertainment library directly to consumers, is another example. Imagine a scenario where a retailer integrates backward with a producer or a manufacturer. Now, suppose, for the sake of this example, that this vertical backward Integration occurs in an industry or market where one of two large producers controls much of the good needed to make the finished product. In this case, integration can lead to increased control over the competitive landscape and the market.
By producing most of its components in house, it is able to undercut its costs largely as compared to its competitors. It can also benefit the company by adapting to lower pricing strategies, having a better knowledge of consumer behavior, and providing more facilities to the end consumers. 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. To put it simply, Reliance has completed the process of backward integration rapidly, efficiently, and with scale – ensuring any plants they built were the biggest and most technologically advanced of their kind. To know backward integration, we must first understand the difference between vertical and horizontal integration. RIL is India’s leading Fortune 500 enterprise, raking in revenues of $92 billion in 2020.
Types of Vertical Integration
Through vertical integration, firms are able to benefit from a close co-operation between both parties. For instance, proximity issues may be addressed by moving facilities closer to each other. Backward vertical integration is where a company joins with another that is at a stage before itself in the supply chain. It is known at backward vertical integration because the firm is behind in the supply chain. So, in a basic supply chain of raw material extraction, manufacturing, and distribution – the distributor could merge with the raw material extractor or the manufacturer and be classed as backward vertical integration. Vertical Integration is when a company acquires another company that operates before or after it in the supply chain.
- For example, I’ve seen many people criticise Fabelle’s entry in a premium range instead of going directly to a low costing massmarket segment, even though the top down approach has worked for them so far.
- Vertical integration refers to any effort by a company to take ownership of two or more steps in this supply chain, thereby “integrating” them into its own business.
- RIL started off as a textile enterprise producing textile and synthetic fabric in the 1970s and eventually moved into their supply industries.
- Not only does it own its own retail stores and distribution, but the vast majority of its clothes are sourced in-house.
Conversely, backward integration might involve the clothing manufacturer buying a textile company that produces the material for their clothing. 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 backward integration example in india IBM. 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. The Jamnagar complex soon saw expansion projects to add production capacities for other chemicals such as Mono Ethylene Glycol (MEG) and Paraxylene (PX) in addition to PTA.
Key Milestones in the history of Reliance Group:
McDonald’s, the world’s largest restaurant company, also employs Vertical Integration. The company integrates backward by running manufacturing plants to procure raw materials used to prepare its eatables. Other than this, the company also grows its agricultural products to maintain a uniform quality standard. Another successful example of vertical Integration is the globally renowned brand ZARA. The company manufactures the clothes it sells in its retail stores as well designs them in-house.
Even more so than for established firms, this is a critical issue for new companies, given that they are typically bootstrapped or working on limited funds. Integration strategy is used by the firms to increase market share, become more diversified, eliminating the cost of developing new product and introducing it to the market, minimizing competition by taking over competitor’s business, etc. When two firms at different stages of the supply chain join together, the feedback connection is enhanced. When trends or tastes are changing, this can be pro-actively fed back to the integrated suppliers who can then work on alternative solutions.
Next wave of backward integration in the energy sector: RIL, a case in point.!
Companies pursue vertical integration for a number of reasons, including increased control, reduced costs or improved margins. When a company takes over an upstream step, such as a manufacturing business taking over sourcing of raw materials, it is called backward integration. When a company brings a downstream step in-house, such as a manufacturer that opts to open retail or ecommerce direct sales channels, it is called forward integration.
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Which company in India is an example of backward integration?
Another backward integration example could be an automobile organization owning a tire organization, a glass organization and a metal organization. This strategy attempts to move organizations backward in the supply chain so that they have control over the raw materials.