LINKAGES OF

RESOURCES
LINKAGES OF RESOURCES

Can be the source of business opportunities using

backward, forward, and horizontal integration.
Backward Integration

is the ownership or control of the inputs of production by

the enterprise.

Backward integration is a form of vertical integration by

which the Company integrates its operations with the
suppliers or the supply side of the business. The
Company gains control over the raw material suppliers
by integrating them with their ongoing business.
Example

Suppose there is a Car Company, XYZ which gets a lot of

raw material like iron and steel for making cars, rubber for
seats, pistons, engine etc. from various suppliers.

If this car Company merges/ acquires the supplier of iron

and steel it will be called backward integration.
Example

Another backward integration example would be a

tomato ketchup manufacturer purchasing a tomato farm
rather than buying tomatoes from the farmers.
Advantages of Backward Integration
#1 – Increased control
By integrating backward and merging with suppliers,
Companies can control their supply chain in an efficient manner.
They will control the production of raw materials till the
production of the end product. By this, they will have a larger
control on quality of raw material to be used in production. Also,
the Company secures itself with the supply of material. It will
ensure that the Company receives adequate supplies as and
when required without worrying about raw materials being sold
to the competitor or not produced /manufactured by the
suppliers.
Advantages of Backward Integration

#2 – Cost Cutting
Generally, backward integration is done to cut the costs. In a
supply chain, there is always a markup when goods are sold from
one party to another. The supply chain involves various suppliers,
distributors, middlemen. By integrating the business with the
producer of material, the Company can remove these
middlemen from the supply chain and cut the markup costs,
transportation and other unnecessary costs involved in the whole
process.
Advantages of Backward Integration

#3 – Efficiency
While the Company will cut costs, backward integration also
provides better efficiency in the whole manufacturing process.
With control over the supply side of the chain, the Company can
control when and which material to produce and how much to
produce. With improved efficiency, the Company can save its
cost on the material which gets unnecessarily wasted due to over
purchase.
Advantages of Backward Integration

#4 – Competitive Advantage and Creating Barriers to Entry

Sometimes Companies, to keep the competition out of the
market can acquire the supplier. Consider a scenario where a
major supplier supplies materials to two Companies but one of
them purchases the supplier so it can stop the supplies of goods
to the competitor. By this way, the Company is trying that the
existing competitor exits from business or look for another supplier
and creating entry barriers for new Competitors. Also, sometimes
the Company may integrate backward to gain access and
control of technology, patents and other important resources
which were only held by the supplying firm.
Advantages of Backward Integration

#5 – Differentiation
Companies integrate backward to maintain differentiation of
its product from its competitors. It will gain access to the
production units and distribution chain and thus can market itself
differently from its competitors. Integrating backward will
enhance the Company’s ability to meet the customers demand
and may also help it to provide customized products since now it
holds the production capacity internally than sourcing it from the
market.
Disadvantages of Backward
Integration
#1 – Huge Investments
Integration, merging or acquiring the manufacturer will require
huge investments. It will be an extra burden on the Company’s
balance sheet may be in the form of debt or reduction cash and
cash equivalents.
Disadvantages of Backward
Integration
#2 – Costs
It is not always that the costs will be reduced in backward
integration. Lack of supplier competition can reduce efficiency
and thus result in higher costs. Further, it will be an extra burden on
the Company if it could not achieve the economies of scale that
the supplier can achieve individually and produce goods at lower
cost.
Disadvantages of Backward
Integration
#3 – Quality
Lack of competition can lead to less innovation and thus low
quality of products. If there is no or less competition in the market,
the Company will become less efficient/less motivated in terms of
innovation, research and development as it knows it can sell
whatever it produces. Hence, this could impact the quality of the
products. Further, if the Company wants to develop a different
variety of goods, it may have a significant cost for in-house
development or it may incur high costs for switching to other
suppliers.
Disadvantages of Backward
Integration
#4 – Competencies
The Company may have to adopt new competencies over
the old ones or there may be a clash between the old and new
competencies causing inefficiency within the Company.
Forward Integration

it is the ownership or control of the marketing system by the

enterprise

A company can decide to expand its business activities to

include control of the direct distribution or supply of the
company’s products. This kind of business strategy is
known as forward integration.
Example

1. A farmer i.e. a producer of vegetables directly sells his

products at the farmer’s markets.

2. A manufacturing company of ski equipment opens it

outlets in various ski resorts to offer the customers a brand
experience to improve its brand image and brand
recognition along with having direct selling contact with
the customers.
 Backward Integration
Forward Integration

Here the company acquires or merges Here the company acquires or merges
with a distributor. with the supplier or manufacturer.
The main objective of forward integration Main objective of backward integration is
is to achieve larger market share. to achieve economies of scale.
Here the companies are looking forward Involves internal steps to reduce overall
to expand their distribution or improve dependency on suppliers and service
placement of their products in the market. providers.

Gives control over supply chain. Gives control over purchasing power.
Advantages of Forward Integration

 Low costs due to the elimination of market transaction costs.

 Reduction in transportation costs.
 Proper coordination in the supply chain as there is synchronization of
supply and demand.
 Bigger market share.
 Strategic independence
 Better opportunities for investment growth.
 Creates entry barrier to potential competitors.
Disadvantages of Forward Integration

 Leads to higher cost if new activities are not managed properly.

 May lead to lower quality of product and reduced efficiency due to
lack of competition.
 Increased bureaucracy and high investments may lead to lesser
flexibility.
 Inability to offer product variety as in-house efficiency and skill sets
are required.
 Possibilities of monopoly arise.
 Organizational structure may become rigid due to shortcomings of
such implementations.
Horizontal Integration

– it buys or control some of its competitor. However, this is

unfavorable in the point of social interest.

is a type of business expansion strategy, which comprises a

company acquiring other companies from the same
business line or at the same level of value chain so as to
subside competition.
Example

Sun Cellular Company Smart Corporation

Jollibee and Red ribbon and Mang Inasal

 Due to lesser competition, there operates an

environment of consolidation and monopoly in the
industry. However, it can also create an oligopoly if there
are still some independent players in the market.
Thank you…