What is Forward Integration?

Explanation

How does Forward Integration work?

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Let us see an example. Company Intel supplies the company DELL with processors, which are intermediate goods placed within DELL’s hardware. If Intel decides to move forward in the supply chain, it may think of a mergerMergerMerger refers to a strategic process whereby two or more companies mutually form a new single legal venture. For example, in 2015, ketchup maker H.J. Heinz Co and Kraft Foods Group Inc merged their business to become Kraft Heinz Company, a leading global food and beverage firm.read more or acquisition of DELL to own the manufacturing portion of the industry.

Again if DELL wants to implement this strategy, it can take control over the marketing agency that the company previously used to market its end product. If Intel decides to follow them, then, in the long run, it can operate as a monopoly and dominate the market by controlling both raw material and finished product. Buy DELL cannot take over Intel if it plans to integrate forward because only a backward integration allows a movement up the supply chain.

When to Follow Forward Integration?

  • When the existing distributors, as well as the retailers, are expensive and are not able to match up to the distribution needs of the company.The absence of quality distributors in the market helps the company in gaining a competitive edge over the competitors;When the company has adequate human resources, like human resources and the financial advantage to meet the expenses of the distribution channel.When the company has very good production facilities to satisfy the customers’ demand, in this case, it will help in strengthening the organization’s value chain from production to sales and support of the products.When the existing retailers and distributors have a higher profit margin, Profit Margin, Profit Margin is a metric that the management, financial analysts, & investors use to measure the profitability of a business relative to its sales. It is determined as the ratio of Generated Profit Amount to the Generated Revenue Amount. read more which increases the cost of the product and leads to the higher price of the product, with the help of this integration, the company can reduce the cost of distribution; hence the product price will be lower thus increasing sales.

source: money.cnn.com

Top Examples of forwarding Integration Strategy

  • A bicycle tyre manufacturer starts manufacturing bicycles, i.e., the end product.An FMCGFMCGFast-moving consumer goods (FMCG) are non-durable consumer goods that sell like hotcakes as they usually come with a low price and high usability. Their examples include toothpaste, ready-to-make food, soap, cookie, notebook, chocolate, etc.read more company like Britannia builds up its distribution network, including regional warehouses, to directly sell to the retailers without going via wholesalers.A farmer, i.e., a producer of vegetables, directly sells his products at the farmer’s markets.A manufacturing company of ski equipment opens its outlets in various ski resorts to offer customers a brand experience to improve their brand image and recognition, along with direct contact with the customers.Myntra, an e-commerce company starts its own logistics service- Myntra Logistics, to reduce costs, improve turnover time, and reach its customers timely.A software company starts its own consulting and software development services to not depend on a network of partners to help customers implement its products.Flipkart, an e-commerce company, has its customer service functions instead of outsourcing them to improve customer experience.

Key Differences between forwarding and Backward Integration

Advantages

  • Low costs due to the elimination of market transaction costsReduction in transportation costs.There is a synchronization of supply and demand and proper coordination in the supply chain.Bigger market share.Strategic independenceBetter opportunities for investment growth.Creates an entry barrierEntry BarrierBarriers to entry are the economic hurdles that a new entrant must face in order to enter a market. For example, new entrants must pay fixed costs regardless of production or sales that would not have been incurred if the participant had not been a new entrant.read more to potential competitors.

Disadvantages

  • It leads to higher costs if new activities are not managed properly.It may lead to lower product quality and reduced efficiency due to competition.Increased bureaucracy and high investments may lead to lesser flexibility.The inability to offer product variety as in-house efficiency and skillsets are required.Possibilities of monopoly arise.Organizational structure may become rigid due to the shortcomings of such implementations.

Forward Integration Video

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