Backward integration is a type of horizontal integration where a firm vertically develops its function to fill existing tasks previously done by other firms in the same industry. Simply put, backward integration is where a firm purchases another firm that provides the same goods or services required for
Backward integration
production.
Advantages of backward integration
The advantages of backward integration are that the purchase reduces the costs of production since no new resources are required, the relationship between the two firms becomes stronger as they complement each other, and the firm's resources become more flexible as it can be used to address new market opportunities.
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A backward vertical integration strategy is, therefore, most effective when there is no financial transaction involved (because of the absence of a purchase contract). However, because of the potential for losses from unexpected circumstances.
A backward vertical integration strategy can be used when the firm is expecting future growth and for periods beyond its present financial capability. When a firm adopts a backward integration strategy, it requires a supplier that can supply the necessary raw materials and components needed by the manufacturer.
The relationship between the two firms can either be an exclusive or non-exclusive one. In case of an exclusive arrangement, the manufacturer ensures that only appropriate suppliers of the required components are contacted and that no other firm is allowed to access the resources. The suppliers in turn agree to provide only the components and materials that are required by the company.
Non-exclusive arrangements allow a firm to access the resources of other firms without worrying about damaging their reputations or damaging their own market position. A third-party logistics provider can sometimes provide the best mix between the two, and therefore a backward integration might be more appropriate in this case.
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